These 3 Biotech Stocks Are Better Buys Than Gilead

December 22, 2016
By Mark Terry, BioSpace.com Breaking News Staff

Generally speaking, investors really want Gilead Sciences to buy another company. That push has been on for at least the last year-and-a-half. Its shares are down about 23 percent this year. Nonetheless, it has an impressive portfolio and annual sales of more than $30 billion. But it’s taking some hits in its dominant hepatitis C (HCV) portfolio and its margins are shrinking.

Keith Speights, writing for The Motley Fool, points out that Gilead has a low valuation, a good dividend, and a lot of cash. All good things. And if you’re interested in other biopharma companies with similar characteristics, he recommends three.

1. Baxter International

Noting that Gilead is trading at about seven times trailing 12-month earnings, Speights says that Baxter International is even cheaper—five times earnings. Baxter focuses on medical instruments and hospital supplies, and although not as flashy as hepatitis or HIV drugs, has strong gross margins. Its stock is expected to rise 18 percent over the next year, with earnings improving by 12 percent.

“While Gilead’s stock is cheap because its revenue is falling, Baxter actually made more money in the first nine months of 2016 than it did in the year-ago period,” Speights writes. “Granted, sales were up only 2 percent—but that’s a lot better than Gilead’s 4.4 percent decline during the same period.”

2. AbbVie

Not many biotech companies pay dividends, but both Gilead and AbbVie do. Gilead’s dividend yield is 2.49 percent. But AbbVie’s is 4.13 percent. According to Speights, AbbVie is presently returning about 60 percent of its earnings to shareholders in dividends, which should increase. It has a very solid pipeline.

“There’s a strong case to be made that AbbVie is more committed to its dividend than Gilead is,” Speights writes. “The company has increased its dividend by a whopping 60 percent in just four years. AbbVie inherited a rich tradition of prioritizing dividends from its parent Abbott Laboratories , which ranks among the Dividend Aristocrats—companies that have increased their dividends for at least 25 consecutive years.”

2. Amgen

Gilead has an amazing amount of cash—$31.6 billion in cash, cash equivalents and marketable securities. Few companies can say that … except Amgen . Amgen had $38 billion at the end of the third quarter. Both Gilead and Amgen use cash to pay dividends, with Amgen’s current yield at 2.66 percent.

With so much cash at hand, most investors think—or at least want— the companies to invest in something, preferably a hot biotech company with a potential blockbuster drug just about ready for approval. Certainly investors are pushing Gilead on that front.

“It is important to note, however,” Speights writes, “that Gilead could leap ahead of Amgen with respect to its cash position in 2017. Gilead’s cash from operating activities during the first nine months of this year totaled $13.18 billion; Amgen generated $7.25 billion in cash during the same period. Even with sales for Gilead’s hepatitis C drugs Harvoni and Sovaldi falling, the company appears likely to top Amgen’s operating cash flow in the year ahead.”

Which hardly means investors should abandon Gilead. Investors are undoubtedly frustrated by Gilead’s slow response to faltering HCV sales and its reluctance so far to gamble on acquisitions, but it’s still a great company. And, as Speights writes, “One smart acquisition could change the dynamics entirely for the big biotech.”

Suggestions? How about Puma Biotechnology , Incyte Corporation , Kite Pharma or Portola Pharmaceuticals ?